The UK stock market might be in for a rough ride this winter. Coronavirus infection rates are already rising, and the colder months ahead could make things worse. However, I think Sumo (LSE:SUMO) shareholders will do just fine if that happens, while the Cineworld (LSE:CINE) share price will suffer.
Cineworld’s 663 theatres across the UK and US remained shut from March through much of summer 2020. This lead to a reported loss of $1.64bn for the first six months of 2020. At the same time, $419m of net debt was issued, further bloating the balance sheet. Around three-quarters of Cineworld’s theatres were showing films again in September. Last week they all closed again. Too few customers are tempted by the limited film releases to cover the costs of keeping screens lit. Until the lockdowns and restrictions needed to control the coronavirus are gone, the situation will not improve. When will that be? Another six months of empty theatres for Cineworld does not sound implausible.
Cineworld’s management and its auditors are concerned and, raising more debt or issuing more equity to stay afloat is likely. If Cineworld survives the coronavirus crisis, things might still be challenging. Straight to the small screen productions used to be tagged as inferior. Things have changed now. I would not be surprised to see big-budget releases hitting the small screen not long after, or even at the same time, as they hit the big screen in the future. This weakens the appeal of going to the cinema. Even though Cineworld’s share price is 29p, well below its all-time high of around 300p, I would not buy.
Shares in video games developer Sumo currently trade nearly 30% above their pre-crash high of 205p. But I still think they are worth buying. The gaming industry got a boost from the coronavirus crisis. People were stuck for things to do at home and turned to games for entertainment. Sumo was able to increase its revenues and profits from £21m and £0.74m in the first half of 2019 to £26m and £3.09m in 2020.
Unlike Cineworld, Sumo’s balance sheet is light on debt and looks healthy. It raised equity in July year, but at a high share price and to fund growth, not keep it afloat. Sumo has reported that it did not and does not expect to use any furloughing arrangements or other government Covid-19 support measures.
Smartphones and tablets have brought gaming to the masses. It is no longer the preserve of kids and a niche pastime for adults. Other platforms, like consoles and PCs, have benefited from the rise in mobile gaming. The coronavirus outbreak has only improved the popularity of mobile and dedicated console and PC gaming.
Sumo has exposure to mobile gaming, but also games made for consoles. It does make a lot of money from providing services to other game developers but also makes its own games. The acquisition of two developers this year has boosted Sumo’s games development portfolio. Sumo is hitching a ride on the gaming industries continuing growth, which will continue with and without the spectre of the coronavirus. I would buy shares in Sumo.
James J. McCombie has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.